November 9, 2026

The Cost of Waiting in Cash

by Ewen Emmerson

in Insights Research

Why the choice that feels safest after a market fall is rarely the safest over time.

Last week was an uncomfortable one for investors. On 5 November, US shares had one of their sharpest one-day falls in years, led by companies linked to artificial intelligence, and the selling spread to Asia the following day. In the week before the fall, investors had already moved $172.7 billion into money market funds, the largest weekly inflow since April 2020.

The instinct to retreat to cash at moments like this is entirely understandable. Cash feels safe. Its value does not fall on the day the headlines turn. But feeling safe and being safe are not the same thing, and the difference matters more over years than over weeks.

What cash does well

Cash has an important place in any financial plan. Money you will need in the next year or two, for a house purchase, a tax bill, school fees or simply peace of mind, belongs in cash or something very close to it. Its value is certain, it is available when you need it, and no market movement can take it away at the wrong moment. Holding enough cash for known spending is good planning, not timidity.

The question is what happens to money that is not needed for many years, but is held in cash anyway, waiting for the outlook to clear.

What cash costs over time

The first cost is inflation. Bank Rate has just risen to 4%, which makes cash look rewarding. But UK inflation was 3.5% in September, and the Bank of England expects it to rise further before it falls, to a peak of around 4.9% on its central forecast. Over the coming year, cash may struggle even to keep pace with prices.

The second cost is tax. For a higher-rate taxpayer whose interest is fully taxable, a 4% deposit rate becomes 2.4% after tax, which on today’s inflation is a loss of purchasing power of more than 1% a year. For an additional-rate taxpayer, the loss is larger still, and the Budget has increased tax on savings income by a further two percentage points from April 2027.

Over long periods, these costs compound. The UBS Global Investment Returns Yearbook, which tracks returns back to 1900, finds that in the United States, the market with the longest continuous records, cash has delivered a real return, after inflation, of around 0.5% a year. Government bonds have delivered around 1.6% a year and shares around 6.6%. At those long-run average rates, £100,000 held in cash would have grown in real terms to around £113,000 over 25 years. In government bonds it would have grown to around £149,000, and in shares to almost £500,000. Averages are not promises, and no investor experiences the average exactly, but the gap is too large to ignore.

The problem with waiting

The deeper difficulty with moving to cash is not the decision to leave, but the decision to return. To come out ahead, an investor has to be right twice: once in selling, and again in buying back before prices recover. Recoveries rarely wait for the news to improve.

April 2025 is a recent example. After tariff announcements, US shares fell by more than 10% in a single week. Within a month they had recovered all of those losses, and within three months they were at record highs. Anyone who moved to cash during that week had to decide when to go back in, and most of the recovery happened while the headlines were still alarming. Past events are no guide to what will happen this time, but the pattern is a common one: the moments that feel worst are often close to the moments when patience is best rewarded.

A better home for cautious money

For investors who want less risk, the choice today is not simply between cash and shares. High-quality government bonds now offer yields of around 5% over ten years, well above Bank Rate and far higher than for most of the past fifteen years. Several large investment managers now expect bonds to deliver their best long-term returns in two decades. Bonds can still fall in value when interest rates rise, as investors have seen this year, but they also did what is expected of them last week, rising as shares fell.

The same week showed the value of diversification more broadly. While US technology shares fell sharply, UK and European shares fell only around 0.4%, cushioned by their much smaller exposure to technology, and gold rose over the week. A portfolio spread across different kinds of assets, and different regions, gives many more ways for something to be working when something else is not.

How we think about it

Cash is the right answer for money you need soon. For money you will not need for many years, it is usually an expensive way to feel safe, because the costs of inflation, tax and mistimed decisions accumulate quietly. The better response to an uncomfortable market is usually to make sure the mix of investments still matches your timescale and your needs, rather than to step out of the market altogether. Perspective, not prediction.

If you are holding cash for the long term and would like to talk through the alternatives, we would be happy to arrange an initial conversation, without obligation.

This article is for information only and does not constitute personal advice or a recommendation to buy or sell any security, fund or index. The value of investments can fall as well as rise and you may get back less than you invest. Past performance is not a guide to future returns. Tax treatment depends on individual circumstances and may change in the future.